Block chain is an emerging technology
Is blockchain the end of banks?
Blockchain promises to make intermediaries such as banks superfluous and to replace them with decentralized peer-to-peer networks. This article asks the question of the feasibility of this announcement and the social implications associated with it. A historically informed theoretical analysis shows that the generation of credit money by banks is an existential process for capitalist societies. For its part, the fiction of the value of money requires credible intermediaries who are permanently in a position to stage the stability of money in terms of time and space. Exploratory interviews with players in the financial sector in combination with a content analysis of relevant blogs, white papers and articles in the business press suggest that blockchain by no means eliminates intermediaries, but rather allows those who are able to adapt the technology to their needs to become more powerful.
Blockchain promises to make all kinds of intermediaries redundant and replace them with decentralized peer-to-peer networks. My paper examines the credibility of this claim and questions its societal implications. I argue that the creation of credit money by banks is an existential mechanism in capitalist societies because it sustains the power relations within the society. The fiction of the variability of money relies on trustworthy intermediaries that can temporally and spatially perform monetary stability. Drawing on explorative interviews with actors in the financial sector as well as content analyzes of relevant blogs, white papers, and publications of the business press, I conclude that blockchain does not eliminate intermediaries. On the contrary, it proves advantageous for those who are able to shape the technology to their needs.
Not only since the announcement of Facebook founder Mark Zuckerberg Libra Establishing a digital currency, the media outdid each other with declarations, promises and concerns about a new, ominous technology: blockchain. Probably the best-known application of blockchain is Bitcoin, the first digital currency (cryptocurrency) with which transactions can be processed in a worldwide decentralized payment system. This technology was invented in 2008. A person or group with the pseudonym Satoshi Nakamoto had the goal of developing a currency that would function purely on a peer-to-peer basis, i.e. without banks, and thus beyond the influence of the state is. A quality that appeared particularly attractive at the height of the 2007/08 financial crisis and in view of the profound state intervention in the financial sector that followed.
It soon became clear, however, that the possible uses of blockchain go far beyond digital currencies, which motivated a whole range of commercial players, initially start-ups, but also banks and traditional computer companies (above all IBM) to develop blockchain further participate. Blockchain is essentially a decentrally stored digital protocol that records all transactions. This log can be viewed by everyone and is characterized by the technological impossibility of manipulating bookings made afterwards without being noticed. Blockchain enables a new form of bookkeeping in which all accounts and transactions are transparent, mapped in a journal that is stored decentrally. As a result, blockchain promises to switch off the (power) authorities that were previously necessary to validate transactions, such as states, but also banks or credit card companies. Transactions of all kinds, from payment transactions to the contractual definition of property titles, should now take place on a peer-to-peer basis and no longer have to be verified by a third party.
However, whether blockchain can actually make all intermediaries superfluous and replace them with decentralized peer-to-peer networks, as the utopias of the blockchain apologists suggest, is an open question. This question is not only of speculative interest, but sociologically or politically economically relevant to the highest degree, since the answer to it touches on the foundations of the capitalist social order, because capitalist economic systems are dependent on centralized exchange systems with dominant actors, such as central banks. The importance of centralized exchange systems for capitalist societies is related to the nature of money. So money in capitalist societies always has a twofold nature. In addition to its function as a medium that makes exchange more efficient and enables the storage and comparison of abstract values, it takes on a second form: It is credit money produced by banks and is thus a social technology (Ingham 2004). The functioning of this technology depends on institutions that can credibly guarantee its stability and convertibility both in terms of time and space. In this sense, I will contradict the assumption of the blockchain apologists that the current centralized structure of the financial system is due solely to the technological impossibility of building and maintaining large peer-to-peer networks.
In order to understand and check the claim that blockchain makes banks superfluous, not only technologically, but also sociologically or politically, in the first part of this article I will work out how the generation of credit money depends on centralized intermediaries. In capitalist economies, these centralized intermediaries are usually a nation-state nexus made up of a central bank and individual commercial banks, which are more or less reliably able to generate trust in the stability of money in terms of time and space.
In the second part, I will assess the potential for change of blockchain on this theoretical basis. In order to take into account the complexity of the subject, I decided to use a triangulative method. My empirical research includes: (1) the content analysis of relevant blog and forum entries or publications in the traditional business press, (2) qualitative interviews with experts and (3) the participatory observation of events in the blockchain scene.
I tried to systematize these individual empirical findings in order to be able to classify the development of blockchain. Due to the topicality of the technological development of blockchain-based innovations in the financial system, my research cannot be anything other than an initial exploratory analysis. The aim of this approach is less generalizability than the attempt to map a current development as systematically as possible using methods of empirical social research and to analyze it on the basis of political-economic theory.
I will conclude this article with the thesis that the digitization of financial services is only less about technology or innovation. Rather, it is about the fact that new players, above all large technology companies such as Facebook, Google and Amazon, want to gain power over payment flows or money.
Credit Money and the Importance of Centralized Intermediaries
Introductions to the subject of money, be they economic or economic sociological, usually consist of catalogs in which the functions of money are described. Despite some variations, money is essentially assigned three functions. Probably the one most firmly anchored in everyday consciousness is the function as a medium of exchange. By agreeing on a medium that is easy to transfer, the exchange of goods and services becomes more efficient, which enables the division of labor that is essential for modern societies. The second function of money as a store of value is also immediately apparent. Georg Simmel emphasizes, however, that money does not simply preserve value, but enables the accumulation of abstract values and thus promotes the individualization that is constitutive for modernity (Simmel 1900). The third function of money, which is indispensable for modern societies, is that of the measure of value or as a unit of account. Only through money as a measure of value are the goods and services traded in an economy put into a relationship and thus comparable. Only on this basis is it possible to compare values, which enables rational action based on an abstract cost-benefit calculation. This function of money is perfected with double-entry bookkeeping (Vormbusch 2012).
The reduction of money to these functions implies that social science theory does not attach any importance to money in addition to its function as a medium that depicts and transfers values. Most decidedly this is done by neoclassics, which has completely banned money as an influencing factor on macroeconomic development (Smithin 2003). Sociology (framed in terms of communication theory) has essentially adopted this assessment since Parsons (Deutschmann 2000). Although there was from the STSFootnote 1-informed Anglo-American economic sociology, some extensions that have worked out that money is by no means just a formless and colorless medium that can be easily transferred at any time, but is deeply embedded in cultural practices (Dodd 2014; Zelizer 1997). But even these approaches pay insufficient attention to the political and economic dimension of money.
Parallel to the extensive neglect of money as a major political-economic influencing factor in the sociological and economic mainstream, there is a dispute about the nature of money that goes back to the middle of the 19th century.Footnote 2 In addition to the goods theory of money, which is only briefly presented here, in which money is primarily discussed with regard to its exchangeability, there is a second theoretical concept. In this perspective, often referred to as credit theory, the origin of money is identified in the numbering of abstract values (debts). One of the most important current representatives of this direction is the sociologist Geoffrey Ingham, who follows the tradition of Schumpeter. This emphasizes that money, in addition to the functions that are undoubtedly useful for modern societies (as a medium of exchange, store of value and unit of account), has another dimension: It becomes credit money produced by banks and thus expresses a social relationship. Ingham (2004) locates the origin of modern money in the union of two previously separate forms of money: the everyday means of payment (currency) and the promissory notes issued by the banks. Historically, Ingham locates this process in 17th century England. Due to the stable balance of power between the royal family and the emerging middle class, both sides recognize that they could benefit from an alliance. While the state secures constant access to fresh money by issuing state promissory notes, the owning classes gain regular income through interest and benefit from "repayments" of taxes and levies through the establishment and constant maintenance of a reliable infrastructure. The result was the already mentioned merger of the state currency and the loans granted by private banks (Ingham 2008, 2004).
From this union emerged the decisive precondition for the rise of capitalism: a financial sector that enables the creation of credit money by banks, which then became purchasing power for the emerging companies (Schumpeter 2006). In capitalism, money is created through the granting of credit by banks and therefore has no intrinsic value, but is essentially a relationship of trust, the basis of which is the credibility of the promise to pay (Beckert 2018, p. 174). In order to maintain this fragile equilibrium, according to the thesis of this article, centralized intermediaries are needed who can credibly stage the value stability and convertibility of money. In modern times these are no longer merchant dynasties like the Medici or the Fugger, but a state-regulated nexus of private banks and the national central bank. The national legal system provides rules for private and public money creation and also provides the state power apparatus to enforce loan agreements.
With the concept of fictional expectations I am referring to a concept by Jens Beckert (2018) who suggests how the analysis of interaction at the micro level can be related to capitalist dynamics. With regard to my interest in knowledge, this theoretical cut is particularly appealing, as it can be understood from this perspective how prerequisites the institution of money is, because in order for it to function, the actors must permanently treat goods that are intrinsically worthless as if they were valuable. In other words, it is about building and maintaining relationships of trust that are strong enough for people to permanently exchange colorful paper or numbers on a computer screen for valuable items such as working hours, groceries, etc. The concept of fictional expectation underlines that trust in money only arises through the complex interplay of institutional rules and processes of monetary stability in an economy with the discursive processes in which these are interpreted.
The creation of trust in a stable monetary value has at least two levels: a temporal and a spatial one. I want to be sure that I can still exchange my hard-earned piece of paper for something that is really valuable tomorrow. And I want to be sure that I will get the goods or services I want in exchange for my colored paper or plastic card 200 km away. Economics in particular has traditionally dealt with the first dimension - trust in the future value of money. In addition, economic sociology offers heuristics with which the complex process of expanding trust in promises to pay can be better understood (Beckert 2018; Dodd 2014; Ganßmann 2013; Carruthers and Babb 1996; Mirowski 1991). The second dimension, however, the creation of the fiction of the spatial stability of money, has so far examined almost exclusively economic history with a view to the establishment of national currencies. With the aim of working out the importance of centralized intermediaries for financial systems in capitalist economies, I will bring together the findings of these approaches in the following two points in order to then go into their political-economic importance.
The fiction of the stability of money over time
Questions about the stability of the value of money over time traditionally fall within the scope of economics. The problem of monetary stability is usually described as follows: Nation states have a constant incentive to increase the money supply by taking on debt, which in the long term increases the price level, i.e. H. inflation rises, potentially reducing confidence in one's own currency. In order to escape this dilemma, at least according to the doctrine of the monetarists, the ultimate goal is to keep the price level stable over the long term. This is usually attempted by creating institutions that are able to strictly adapt the circulating money supply to macroeconomic developments. But what affects the money supply in circulation? In economic textbooks it is usually assumed that the money supply is dictated by the central banks. This belief has its origin in the so-called theory of the money multiplier.Footnote 3 This model assumes that the amount of money in circulation is determined by the amount of money issued by the central bank. More precisely, the model assumes that the central bank money supply can be used to calculate a fixed multiplier that can be used to determine how much money the commercial banks can spend.
There are, however, weighty objections to the thesis that the money supply can be controlled by the central bank. These come in particular from the representatives of heterodox theories. Above all, the theorists of post-Keynesianism criticize that the neoclassic misunderstood the importance of money creation by commercial banks as a major influencing factor on the circulating money supply. From this perspective, banks are by no means mere “intermediary institutions” that mediate money for a fee between those who have too much of it (savers) and those who have too little of it (borrowers) (Sahr 2017; Pettifor 2017). While the neoclassical assumes that commercial banks only grant loans if they already hold the corresponding reserves at the central bank, heterodox economists come to the opposite assessment. They argue that the demand for credit or the (risk) assessment of banks determines the amount of credit issued and thus the amount of money. As a result, it is only through the lending of the commercial banks that the demand for central bank money arises.In this sense, the decision of the banks to grant loans is independent of the central banks, it is only based on the risk calculation of the respective banks (Werner 2014).
The problem structure assumed in economics explains why economics, when it deals with money, looks primarily at the money supply or the institutions that regulate it. From a sociological perspective, however, it can be argued that monetary stability can by no means only be understood as a result of the circulating money supply. Rather, trust in the institution of money is the result of a political-economic discursive process, which is influenced by the amount of money, trust in the interpretation of the methods by which it is measured, and the evaluation of the power of monetary institutions (Beckert 2018, p. 178). Confidence in the future value of money is therefore a complex process that has performative and politico-economic aspects. The decisive factor is not only the formal rules by which the generation of credit money is regulated (e.g. minimum reserve rates, equity or security requirements), but also the stability of the relationships between the market players and the rhetorical strategies used by financial market players (especially those of the representatives of central banks) choose to communicate their assessment of the current economic situation. In the last few decades, for example, there has been increased research on the question of how central bank employees use targeted narratives to try to strengthen trust in the stability of money (Holmes 2013; Abolafia 2010).
In the previous section we saw that the generation of credit money is regulated by a state-regulated nexus of private banks and the national central bank. The linchpin of this institutional structure is the political or regulatory design of the possibility of obtaining liquidity (Mehrling 2010). Commercial banks create money by lending. However, loans must be secured by (newly created) liabilities, at least as soon as they are transferred to other banks. For example, banks can initially create unlimited amounts of money through lending (book money), but as soon as the money created by these loans is transferred to other financial institutions - and this is usually the case very soon after a loan is granted - it must be processed at the time of processing Reserves have been acquired. In times of non-crisis, this usually happens not through direct interactions with the central bank, but through transactions on the interbank market. If, for example, a bank has too few reserves in the evening, it will obtain short-term liquidity from a bank or another financial institution by converting the promises made in the form of collateral to pay at a later date into liquidity on the interbank market.
The political or regulatory design of the options for the procurement of liquidity is subject to a strong historical change (Tooze 2018). However, another aspect also plays an important role. The stability of a financial system is also based on the long-term relationships between individual banks, which can thus compensate for short-term liquidity shocks. Stability is not only created by formal laws, but also by the (trust-saturated) way in which actors fill out the institutional settings. The study by Afonso et al. Shows how strongly decisions by individual banks in the event of short-term payment bottlenecks are characterized by mutual trust. (2014). The three authors come in their study of the US interbank marketFootnote 4 to the surprising result that the vast majority of these transactions take place within fewer (more concentrated) relationships. In other words: banks always lend (and lend) money to the same banks, which is also reflected in better prices (interest rates). H. In most cases, banks give their privileged partners much better interest rates.
The importance of centralized intermediaries is thus made clear: the banking system with central banks as the ultimate guarantor creates the credit money necessary for capitalist economies and is at the same time able to maintain the fictional expectation of its temporal stability. The interaction between private banks and state actors is crucial here, because by observing how much trust the other side has in individual markets, risk is managed (Baecker 2008, p. 77). Despite the strong intertwining of the private and public sectors, the guarantee of a stable value of money in capitalist economies remains risky, because as the ultimate guarantor, the nation state is fully liable if the promise of the future value of money becomes fragile.
The spatial fiction of the stability of money
The second, far less noticed, dimension of trust in money is the spatial or infrastructural one. In other words, the confidence that I can still pay with “the same money” or the same transfer technology (such as credit cards or checking accounts) a few hundred kilometers further, or that the money I have deposited will reach the desired recipient. While historical studies deal with the difficulties that arose in establishing national currencies (Tilly 1989; Garbade and Silber 1979), economic and sociological studies have so far only insufficiently taken note of this problem. Most social science papers simply assume that the anchoring of the currency as legal tender does not pose the problem.
However, this global assumption underestimates how much the spatial stability of money depends on intermediaries who are able to set up and maintain the corresponding technological infrastructure and to nip alternatives in the bud or to integrate them into the existing system. One reason for neglecting the infrastructural component may be the following paradox: The basis for (perfect) markets is an infrastructure that enables transactions that are as frictionless as possible, i.e. free and risk-free. Markets, as one of the fundamental institutions of capitalism, function precisely because fragmented actors meet to compete. However, these encounters are based on a (financial) infrastructure that is as frictionless as possible, i. H. must be centralized (Krarup 2019).
The problem of a missing or inadequate financial infrastructure on the one hand in some countries of the global south (Demirgüç-Kunt et al. 2017), on the other hand with regard to the globalization of the (financial) markets (Krarup 2019; Panourgias 2015) is particularly striking. These actually very different problems have one crucial thing in common: in both cases there is no intermediary that is powerful enough to provide the corresponding infrastructure. While in many nation states the historically grown nexus of central banks on the one hand and commercial banks on the other hand is able to maintain a reliable financial infrastructure in close cooperation, there are often problems with transactions that go beyond the borders of a currency area, as well as in countries with unstable political conditions provide such infrastructure. But what exactly is the challenge in building and maintaining a reliable financial infrastructure? Basically, it is about handling the mutual claims. So-called clearing houses are usually used for this purpose. In these central offices, the reciprocal claims are offset against each other, and at the end of the day only the differences are credited or deducted (Schierenbeck et al. 1994, p. 165). The advantage of such clearing houses is that the transaction partners do not have to negotiate individual conditions every time, which means that transactions work more smoothly. The clearing houses then act as the central counterparty and assume guarantees in the event of bankruptcy, which is why they demand high obligations from their members, usually in the form of reserves. In addition, the members submit to the respective provisions of the clearing house. In this way, the clearing houses not only minimize the individual risk of the members, they also reduce the systemic risk of the entire financial sector by homogenizing the individual credit risks, as they jointly pay for any losses (Kress 2011). The first clearing houses emerged in Great Britain in the 18th century (Millo et al. 2005). Here, some banks began to cooperate with each other and to accept claims from other banks, but these forerunners of today's clearing houses were narrowly regionally limited (Norman et al. 2014). Current variants of clearing houses are typically responsible for entire currency areas and include state actors.
The problems that typically arise in establishing and maintaining a reliable financial infrastructure are, in abstract terms, similar to those difficulties that arise in general in the provision of public goods. On the one hand, suboptimal incentive structures, which systematically lead to an undersupply in the case of private provision of a public good (Atkinson and Stiglitz 2015), on the other hand, the occurrence of strong network effects (Katz and Shapiro 1994). Specifically, the challenge in setting up clearing houses is that the actors involved have to agree on an accounting system that is accepted by all and with which the claims can be settled - usually at the end of each day. In addition, the actors involved must jointly provide the technological infrastructure that is capable of such a complex process. Mutual claims are processed at different, sometimes competing points. Basically, a distinction can be made between three types: firstly, clearing houses in which payment transactions are processed, i.e. payments by credit card or bank transfers; second, clearing houses where banks settle their mutual claims; and thirdly, clearing houses, in which securities such as shares but also central bank reserves are processed.
Traditionally, the difficulties of establishing and maintaining a reliable financial infrastructure have been resolved through close cooperation between private and state actors, state investment in the development of the infrastructure and the monitoring of the infrastructure by the central bank (Allen et al. 2006). However, state activity with regard to clearing houses does not mean that all clearing houses are operated as public organizations; rather, in the course of the neoliberal restructuring in the 1990s, there were increased efforts to privatize the clearing houses operated by the central banks (Krarup 2019). Nevertheless, it is important to emphasize that clearing houses are able to generate spatial stability for money precisely because they do not act in isolation, but are part of the historically grown nexus of central banks and commercial banks. This means that the guarantees of the clearing houses are supplemented by the nation states and that the nation state or the central bank promises control over the private actors involved (e.g. banking supervision).
I have tried to work out that the stability of the financial system not only has a temporal component (i.e. the regulation of the generation of credit money), but that the financial infrastructure also poses a systematic risk for the financial sector. Especially in times when digital currencies (Brunton 2019) are on the rise and FinTechsFootnote 5 try to establish alternative payment systems (e.g. Apple Pay, TransferWise) (Brandl and Hornuf 2020), this seems to be a key finding.
Blockchain's promise: eliminating intermediaries
In the last sections I have outlined the extent to which capitalist economies depend on centralized exchange systems with dominant intermediaries. It is precisely these intermediaries that blockchain technology is supposed to make superfluous, if one follows its apologists. But how realistic is this promise with regard to the financial sector? Answering this question is of course difficult, as not only does one have to speculate about an uncertain future, but also tangible economic interests are involved, which is why interviewees have to be careful with their statements. A further complicating factor is the rapidity of technological development, which leads to a lack of (social) scientific studies that focus on current technological innovations. So far, in social science research, blockchain technology has mostly been discussed in general terms, for example with regard to the potential replacement of institutions by technology (Greenfield 2017) or the enabling of new forms of governance (Filippi and Wright 2018). In addition, there is a discussion of cryptocurrencies in economic sociology (Dodd 2017). As far as I know, this discussion is the first attempt to understand the importance of blockchain for the global financial infrastructure.
In order to meet the above-mentioned hurdles, I decided to take an exploratory approach. The weaknesses of this approach are obvious. In this sense, my study does not claim to be complete or to systematically exclude biased assumptions. Nevertheless, I hope that by doing this I will penetrate an area that would otherwise be hidden from sociological research.
My empirical research includes: (1) the analysis of the current development of blockchain technology in the financial sector using the traditional business press,Footnote 6 relevant blogs and forums,Footnote 7 of blockchain start-up publicationsFootnote 8 and the reports from banks that I have been following since early 2016; (2) nine qualitative exploratory interviews with actors from May to July 2018Footnote 9 from the financial sector who deal with the implementation of blockchain; and (3) participant observation of events on the blockchain scene.Footnote 10
I established contacts with the experts on the one hand at the aforementioned conferences and on the other hand as part of my virtual participation in relevant forums in which the actors keep themselves up to date on the technological development of blockchain and its regulation. Due to the explosive nature of the information, I was unable to record the interviews that were conducted over the phone and therefore made a memory log after each conversation. Participating observation of the listed conferences enabled me to get an impression of which topics were perceived as central in the field and to ask questions to the experts who were giving presentations. It is important to note that I did not carry out the individual empirical “surveys” independently of one another, but that the different empirical approaches complement each other. Specifically, this means, for example, that I prepared and followed up the individual interviews using the material mentioned in order to gradually better understand the field being researched.
In the next few paragraphs I will first give a brief overview of blockchain-based innovations in the financial sector. In a second step, I then relate the theoretical considerations to these developments.
The emergence of blockchain or the attempt to make this technology commercially viable falls in a period in which the financial sector, like other industries, is subject to a surge in digitization. Usually, financial innovations are understood to mean the establishment of institutional structures (Merton 1992). However, this easily overlooks the fact that financial innovations have been increasing since the 1960s at the latest also had a technological component. For example, the expenditures of banks - and overall within the financial sector - for IT are traditionally very high. As early as 1979, the financial sector spent proportionally the most money on IT compared with other industries: 32% of all expenditure - a value that rose to 37.8% by 1992. In the past few years the proportion has fallen to around 18% (Scott et al. 2017). This decline can include this explains that the financial industry was the first to incorporate computers into its work processes. As a result, the IT systems no longer had to be set up, only maintained. This first wave of digitization began in the late 1950s and peaked in the 1980s (Franke 1987). The IT infrastructure of the financial system used today, such as the processing of payments between banks ("interbank settlement"), goes back to this time, which explains many problems with the current IT infrastructure of the financial sector.The current wave of digitization further increases the importance of technology for financial innovations. Correspondingly, the risks generated by the technology are increasing. One symptom of this is that, on the one hand, the demand for employees for simple jobs is falling sharply, while e.g. B. IT security specialists are desperately needed (Burkert 2019).
Blockchain, the fundamentals of innovation
Basically, blockchain is a decentrally secured database or protocol form. A decentrally stored book in which all transactions are mapped. Technologically, this process is based on what is known as cryptographic chaining.Footnote 11 The function of the blockchain is similar to that of the journal in double entry bookkeeping, a book in which all transactions are listed in chronological order. The technological problem that is solved by blockchain is what is known as "double spending", i.e. the challenge of establishing a system that ensures that each currency unit can only be spent once (Filippi and Wright 2018). This problem occurs in all digital payment systems, since there is no material basis (such as metal coins) and the representatives of a value can be generated and passed on as often as desired. In all systems in use today, this problem is caused by centralized clearing housesFootnote 12 solved, who are exclusively authorized to process the payment flows. The need to keep a central book and to guarantee its accuracy requires the development of individual powerful actors. With blockchain there is now the possibility of establishing and maintaining systems in which all assets and interactions are stored in a decentrally managed network, which is why blockchain is also known as "distributed ledger technology". Blockchain thus differs from conventional double-entry bookkeeping in two respects: firstly, in the storage of the “book” on all computers of the people involved in the blockchain, secondly in the technical impossibility of changing this protocol afterwards. The result is a decentrally stored log that can be viewed by everyone. The technological impossibility of subsequently manipulating information unnoticed, so the promise, makes trust in an institution (bank, state, etc.) superfluous. From today's perspective, however, this promise about the revolutionary potential of blockchain, which originates from the early days of technology, has to be countered by the fact that commercial actors are already redesigning the emerging technology for their purposes.
The basis of every blockchain is the so-called consensus, i.e. the technological process that is used to decide whether another block is to be appended, i.e. H. another transaction is validated in the blockchain. The most popular method is Proof of work,Footnote 13 that i.a. used in the Bitcoin blockchain. Disadvantages of this method are firstly the low scalability (too few possible transactions per second) and secondly the exorbitant energy consumption. In order to compensate for these weaknesses of the first generation of blockchain variants, commercial players in particularFootnote 14 a group of consensus procedures (Proof-of-Authority) that solve the problems mentioned, but mostly at the expense of the original blockchain utopia. Blockchains that are based on a Proof-of-Authority-Based on consensus, not all actors participate, only those who are invited by a central body. The members do not trust the technology, but have legally binding contracts with each other that take effect in the event of damage (Voshmgir 2019, p. 74). In this sense it is important to emphasize that there are different types of blockchain or "distributed ledger technologies". So can i.a. the following distinctions can be made:
There are public and private blockchains.Footnote 15 While participation in public blockchains, such as the Bitcoin blockchain, is open to everyone, there are companies or consortia that offer their members exclusive access to their blockchains. So based, for example Libra on a private blockchain, which, according to the promise, will later be converted into a public blockchain.Footnote 16
Blockchains differ in terms of the ability to reveal the identity of their users. While most public blockchains guarantee their users pseudonymity, efforts are being made to develop blockchains that enable the identification of individual users in a targeted manner in order to be more commercially attractive. One example is the project of the former JP Morgan manager Blythe Masters. The goal of your start-up Digital asset holdings is to offer blockchain solutions for the outdated IT architecture of the financial sector. However, the transactions made by banks in the blockchain should remain identifiable here.Footnote 17
There are efforts to create blockchains that can be rewritten afterwards. An example of this is Ripple, a California start-up working on a peer-to-peer payments network or foreign exchange market. Also Digital asset holdings works on blockchains that can be corrected afterwards. However, some experts argue that “distributed ledger technologies” that can be changed retrospectively are not real blockchains, as this possibility corrupts the specific advantages of blockchain. Because of this, too Ripple often not referred to as a real blockchain.
The reshaping of blockchain technology by commercial actors is gradually giving rise to new forms of blockchain application. The change in blockchain can be seen very well in the variety of so-called tokens that is currently emerging. In general, all values generated by blockchains are referred to as tokens. In order to make the new emerging technology tangible for regulatory purposes, most of the actors involved in the regulation of blockchain categorize itFootnote 18 Token as follows:Footnote 19 (1) Currency tokens, i.e. the use of the values generated by the blockchain as an alternative means of payment such as Bitcoin and other crypto currencies; (2) Security tokens for which the aim is to guarantee their holders membership rights or claims under the law of obligations, similar to conventional securities; and (3) utility tokens, which can be understood as digital vouchers and enable their owners to access digital networks or to purchase a service (e.g. downloading an app).
In contrast to the currency tokens, which were mainly generated decentrally (e.g. as a reward for the provision of computing power as with the Bitcoin blockchain), security and utility tokens are generated centrally, i.e. H. distributed according to rules set by the project initiator (Hahn and Wons 2018). One variant is the issue of tokens by blockchain start-ups. These tokens then promise to be something like functional equivalents of shares, which, however, manage without banks and stock exchanges as trading or issuing institutions.Footnote 20 However, many interest groups speak outFootnote 21 in favor of security tokens as securitiesFootnote 22 to treat.
The different properties of blockchain are also reflected in the changing ways in which blockchain is used. While the first and probably best-known application of blockchain was the generation of so-called cryptocurrencies such as Bitcoin or Etherum, banks and technology companies are currently working on other types of blockchain technology. While the inventors of the Bitcoin blockchain had the intention of creating a payment system that enables anonymous payment transactions to create a currency that is withdrawn from the state, it is becoming apparent that the newer variants of the blockchain are committed to other goals.
Possible uses of blockchain in the financial sector
The cryptocurrencies already mentioned are alternative payment systems and at the same time new forms of store of value. In contrast to conventional currencies, cryptocurrencies are based exclusively on peer-to-peer interactions. The lack of centralized (state) power also implies that no guarantees can be given for the stability of the currency. The amount of money available in cryptocurrencies is determined by the technology or the respective protocol, not by (monetary) political measures. In addition, the acceptance of cryptocurrencies depends solely on the individual decision of the seller and the buyer. While conventional currencies are becoming legal tender and must therefore - if basic requirements are met - be accepted in the respective currency area, a seller can independently decide whether to accept Bitcoin or another crypto currency. The legal link between a currency and a geographical area means that payments that are processed within the respective currency area function relatively unproblematically, while payments between different currency areas are associated with a lot of effort and are therefore disproportionately expensive. The hope associated with decentralized systems is to establish a truly global payment system that manages with far fewer fees and delays than current variants. Systems based on blockchain seem to be an ideal solution, particularly for establishing functioning payment systems in developing countries, but also for handling the transfers, which are burdened with very high fees, from migrants employed in industrialized countries to their families in their countries of origin. So far, however, this hope has not been confirmed. The existing cryptocurrencies essentially serve as objects of speculation and, due to the pseudonymity guaranteed in most blockchains, as a means of payment for illegal transactions, such as the acquisition of weapons or drugs on the Internet (Bank for International Settlements BIS 2018, p. 106 ff.). However, efforts are currently being made to create blockchains that generate so-called stable tokens. Stable tokens are attached to other values such as currencies in different waysFootnote 23 or raw materials are coupled or are artificially limited by appropriate algorithms (Voshmgir 2019, p. 176 ff.).
Another possible application of blockchain is similar to these cryptocurrencies in that more efficient solutions for the digital processing of financial transactions are being sought. However, it is not about the creation of new currencies, but about the more efficient processing of transactions with existing currencies. For example, banking consortia or start-ups supported by banks and software companies are trying to find blockchain-based solutions for securities processingFootnote 24 and international tradeFootnote 25 to build up. The aim is to establish blockchain-based alternatives to the current financial infrastructure in both areas, with the help of which the processing of payment flows can be made more effective, since countless intermediaries such as clearing houses are superfluous. The driving forces in this process are, on the one hand, large international banks that have formed consortia, and on the other, technology companies such as IBM, which are striving for technology leadership in the blockchain sector. Most of the solutions developed in these areas are private blockchains, so that participation in the blockchain can be limited by individual powerful actors. At the same time, all of these blockchains are open source so far. H. the source code is openly available. Although almost all large banks are members of one or mostly several consortia, there have so far been no efforts to establish blockchain-based projects that could actually be used in securities processing. At the moment, the banks involved are presumably concerned with ensuring that they are involved in any blockchain-based IT solution in the financial sector as early as possible. In the area of platforms on which international commercial transactions are carried out, we are already further. There are already the first commercially successful use cases of blockchain, such as we.trade. These trading platforms enable international trade to be processed more efficiently by using smart contracts to guarantee immediate payment after receipt of the goods, thus minimizing the risks of international trade (for example the risk of counterparty default).
The incompatibility of blockchain and credit money
It is obvious that the current variants of cryptocurrencies are not credit money. Behind no existing crypto currency is an issuer with a democratically legitimized mandate that promises to keep the currency stable and to give this currency priority over alternative currencies and enforce it through appropriate laws. But what about the general promise of the blockchain apologists to make all intermediaries of the financial system superfluous and to replace them with systems based purely on peer-to-peer interaction? First of all, the euphoric notion of blockchain apologists of various shadesFootnote 26 Colorfully painted and by technophile social scientistsFootnote 27 from a technology-sociological perspective, which has already unmasked many promises of new technologies, also report skepticism to blockchain. We have seen that there are very few commercial projects in which blockchain or “distributed ledger technologies” are actually used. On the one hand, this is due to technological problems such as scalability or the high demand for electricity of current blockchain variants. The actors naturally disagree on the question of whether or in what time span these problems should be resolved. In addition to the question of technological feasibility, it is also crucial that the technology itself is currently undergoing a fundamental change. The driving forces here are companies, above all banks - and no longer autonomous collectives with libertarian utopias. Accordingly, the current variants of blockchain often ignore the original intention of the inventors by restricting access to the respective blockchains, revealing the identity of the users or allowing entries to be corrected at a later date. The result of this process is a technology that makes intermediaries more efficient instead of turning them off.
But the promise to replace all centralized intermediaries in the financial sector with a technology based purely on peer-to-peer interactions also seems questionable in principle. We have seen that capitalist economies are fundamentally dependent on intermediaries who can generate trust in the temporal and spatial stability of the value of money. It is through these intermediaries that credit money is generated. In this perspective, promises to pay no longer only represent an individual debt relationship between individual actors, but become a promise for which the entire system is liable. This process is woven into the institutions of the nation-state, and increasingly also into supranational institutions. From now on, the nation-state not only assumes material guarantees, but also provides the necessary infrastructure for generating credit through its legal apparatus. The fact that financial transactions on a large scale are not carried out via peer-to-peer networks, but instead require centralized intermediaries, is not due to the mere lack of suitable technology, but is deeply interwoven with the structure of capitalist societies. The decisive question is not whether blockchain will replace intermediaries, but which intermediaries are able to prevail.
Not innovation, but power over money
In the last few sections we saw that the utopia associated with blockchain is incompatible with the basic mechanisms of capitalist societies. It has also become clear that beyond crypto currencies and some test projects, blockchain is currently not being used commercially. And even if blockchain should be used in the financial system in the future, these blockchains will probably have little in common with what the anarchist actor or collective Satoshi Nakamoto had in mind. So what is all the hype about a technology that either turns out to be unsuitable or will only be used in a variant that is deprived of any revolutionary potential?
The conviction that innovations in the financial sector are only based to a subordinate extent on technological superiority is not new. For example, Dan Awrey (2013) suggests understanding innovations in the financial sector primarily as reactions to legislation. Many historical studies support this point of view. Mehrling (2010) shows that swaps, which fell into disrepute during the financial crisisFootnote 28 originated in the attempt by the banks to circumvent the rigid regulations of the Bretton Woods Agreement. The current trend towards the emergence of FinTechs that offer financial services in competition with traditional banks cannot be adequately explained by the technology itself (Brandl and Hornuf 2020). While in other industries (e.g. biotechnology) change was triggered by scientific or technological breakthroughs, the success of FinTechs is not based on superior technology, but on other factors, such as successful marketing. So if the digitization of the financial sector is only a subordinate part of technology, what is it about?
Part of the answer is surely: It's only superficially about innovation, actually it's about controlling money. Or to express it in the theoretical terms of this article: It is about who, as an intermediary, can generate the fictional expectation of a stable monetary value in the future. For centuries this was the monopoly of a nationally regulated nexus of central banks and commercial banks, but new players are now trying to take control (Westermaier 2020). The potential to actually make banks superfluous therefore does not have blockchain or the FinTechs, which are accompanied with a wide range of expectations, but rather the large technology companies. Because companies like Facebook, Google and Amazon have three prerequisites that could enable them to build a frictionless global financial system: a huge global customer base, access to their personal data and a broad business model that also includes retail (Bank for International Settlements BIS 2019, p. 55 ff.).
However, the new actors are not interested in creating institutions that take over all the functions of traditional intermediaries in the financial sector, but rather in achieving a monopoly-like position as far as possible when it comes to financial infrastructure. In contrast to the temporal stability of money, the promise of spatial stability is far less risky. Insuring the credibility of promises to pay always goes hand in hand with an enormous risk, as the intermediary is liable in the event of damage, which was impressively evident in the 2007/08 financial crisis. In contrast, the intermediary who provides the infrastructure can potentially skim off the monopoly rent.
One development that already points in this direction is the announcement by Facebook founder Mark Zuckerberg, together with numerous other companiesFootnote 29 a new currency called Libra to establish. Even if the technological basis of Libra is a blockchain is different Libra of the current cryptocurrencies. So based Libra, at least in the original form, on a private blockchain, in which only authorized actors can participate. Transactions via the Libra-Blockchain are also not anonymous, but can be accessed via the Calibra wallet can be assigned to individual individuals. In addition, the Libra-Blockchain is not currently generating new values, as is the case with existing cryptocurrencies. Rather, they stand by the Libra-Blockchain created values in a more or less fixed exchange rate to existing currencies and should be completely supported by them (so-called stablecoinsFootnote 30 emitted). So far there is no information on how this exchange rate is determined and whether or when it can change. In the Libra Paid-in values should be in the so-called Libra Reserve managed or created. What exactly is to be done with the credit remains unclear, the Libra Association writes on their website simply: "The reserve will consist of a collection of low-risk assets, including bank balances and government bonds in currencies of stable and respected central banks."
Contrary to what the Libra Association it is at Libra In other words, not a cryptocurrency in which the amount of money is inherently determined by the technology itself, but an as yet undefined hybrid of a bank, equity fund and a currency controlled by a private company. This is how users of Libra not directly with the reserve, rather this is reserved for authorized resellers. The decision about the amount of money available, the exchange rates with existing currencies, etc. is up to the alone Libra Association. The assumption that with Libra a functional equivalent to banks should be created, so it seems obvious.
In contrast to the banks, which only function efficiently within individual currency areas, promises Libra a global alternative. The dangers are obvious: in addition to the loss of control of national monetary policy, there are as yet unpredictable systemic risks. Because while banks are subject to state regulation, which determines how they should deal with the values stored with them, these rules apply to the Libra Association Not. Rather, arises with Libra a new form of shadow banking.
In which form Libra is actually realized is less a question of the technology itself than of regulation and thus the political balance of power. So far it is largely unclear how Libra is actually being designed, which poses major challenges for parliaments and supervisory authorities. Still, the question was how Libra should be legally classified, the subject of lively discussions in parliaments on both sides of the Atlantic. Overall, the political responses were up Libra cautious to openly negative. For example, in December 2019, the European finance ministers decided Libra not to be allowed for the time being. In April 2020 the responded Libra Association to the criticism presented with a changed concept,Footnote 31 the core of which is the additional offer of products that are firmly linked to individual currencies Libra- Form payment units, stronger measures against money laundering and the promise of higher data protection.
In late November 2020, Facebook announced that Libra to be introduced in January 2021 in a scaled-down form (initially only in a one-to-one ratio to the dollar). The future development of Libra is still open. However, the fear of those involved in regulation, of losing touch with the “digital revolution”, works for them Libra Association. In addition, the problem is that Libra makes it a tempting opportunity not to dismiss an outdated IT architecture of the financial sector, which only functions reasonably efficiently within individual currency areas and excludes large parts of the world's population. With that in mind, the only sensible strategy against autocratic projects is like Librato understand the establishment and maintenance of a truly global, efficient IT architecture for the financial sector as a public good and not to leave this problem to the big tech companies.
Science and Technology Studies.
For a detailed description see Carruthers and Babb (1996
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